For the NYSE, an Exchange of Ideas

December 07, 2005

John Thain, chief executive of the New York Stock Exchange, says his deal to buy the Chicago-based all-electronic Archipelago Exchange (AX) is a win-win situation for everyone. Approved by NYSE members on Dec. 6, the combined exchange will give ordinary shareholders more choices on how to trade and give companies more choices for listing their stocks, he says. It will also strengthen the NYSE to do more deals as global consolidation and competition arise.

Planning to diversify beyond simple stock trading, Thain also issued a call to end the regulatory split that has the futures business regulated by one Washington agency, the Commodity Futures Trading Commission (CFTC), and stocks overseen by the Securities & Exchange Commission (SEC). He would like to move the NYSE into futures, among other businesses, over time. For now, Thain won't say whether he wants to team up with such futures powerhouses as the Chicago Mercantile Exchange.

And, contrary to what many observers argue, he thinks the floor of the NYSE is here to stay. Thain spoke with BusinessWeek Chicago bureau chief Joseph Weber on Dec. 7. Here are edited excerpts of the conversation:

What does this deal do for the NYSE?

It turns us into a for-profit company. Second, it turns us into a public company, and so it gives us a currency we can use in the future. Third, it gives us a broader, more diversified, and faster-growing mix of businesses.

Besides the trading of New York-listed stocks, we'll pick up a position in the over-the-counter trading market [and] a position in the options market. We pick up a trading platform that's particularly well-suited to exchange-traded funds, which is a very rapidly growing product, and we position ourselves to create a second brand [for listing companies].

We're going to create a second listing brand. We're not going to have as low a listing standard as Nasdaq, but [there will be room on Arca for] smaller but rapidly growing companies.

What will it mean to the ordinary shareholders who buy and sell stock on the exchange?

It gives them more choices. From the floor, brokers will be able to execute not only New York-listed stocks but be able to trade in the options market. They'll be able to access the over-the-counter market.

What will happen to the floor?

The floor will continue to exist. The floor adds a lot of value. What I hope will happen, not so much from this deal itself as from the hybrid [combination of computers and specialists] and from automation, is that the overall trading volume will grow.

Some observers say the floor and the specialist system will disappear. Do you agree?

I don't agree that the specialists and the brokers will disappear. As you know, we have a lot of technology already on the floor. The most liquid companies, the top couple of hundred stocks, trade electronically most of the time.

But the rest of the stocks, the next 2,400 companies, trade better with people intermediating between the short-term supply-demand imbalances and using human judgment to determine when to buy and when to sell and at what price. Even in really liquid stocks, when something unusual happens, having a human being exercising judgment is very important.

So they're here to stay?

Yes.

How quickly will you integrate Archipelago's computer trading and yours?

We're not going to integrate it for a significant period of time. We really are going to operate the markets separately, so the NYSE and Arca will continue to operate side by side.

What will the deal mean for companies that want to list either on the NYSE or Arca?

For those companies that qualify to list on New York, it will really be business as usual. For those companies that don't qualify to list on New York, but can qualify to list on Arca, it will give them a new option that they don't have today.

Is Nasdaq your biggest competitive concern?

No. I really look to the Europeans as bigger long-term competitors. You look at Deutsche Borse [the German parent of Eurex] as an example. Deutsche Borse has a market capitalization of over $10 billion. They trade cash, equities. They trade options. They trade futures, derivatives. They have some fixed-income, and they have a clearing and settlement and custody business. They have good revenue growth. They have good profitability, and they're big financially, and that's true for [rival] Euronext as well. I view them as our global competitors over the next few years.

What will the grounds of that competition be -- i.e., what do you have to worry about with Euronext, Eurex, the London Stock Exchange, or other offshore exchanges?

We've seen companies that we would like to have list here go to London and Hong Kong, and then there's also the competition for trading. Where do shares trade? It's really in both the listed side and the trading side.

Any interest in getting into futures?

The U.S. has a regulatory split in terms of how futures are regulated, by the CFTC, vs. the cash markets, regulated by the SEC. That has kept those marketplaces separate. But in most of the other parts of the world, the cash markets and futures markets are combined. I think they should be combined. I do think there will be opportunities over time between cash and futures.

Would you advocate an end to that regulatory split?

To the extent that it's an artificial barrier to what would be a more logical market structure, I think there should be some way the cash markets and futures markets should be able to be combined. There are different ways that that could be done.

What other product areas do you see yourself getting into? What other markets, either in products or geography?

I think options, futures, derivatives, and fixed-income are really probably the biggest areas.

After a few days somewhere warm, what's first on your to-do list now?

As I look into 2006, I would say there's really three things: first, making sure the deal gets closed and that we in fact integrate well and get the revenue opportunities and the expense reductions. So that's going to be important. Second is bringing [the specialist-computer hybrid system] online. And then third is looking at other opportunities to grow our business and/or consolidation in the marketplace.